XLU Analysis

Utilities Select Sector SPDR Fund (XLU)

Update 1/9/2017:  This trade, shadowing one on Dough, proved to be winner. Implied volatility fell through the period I held the position. That, combined with time decay, produced the profit.

Shares rose by 0.6% over 31 days, or a 7% annual rate. The options position prduced a 110.5% yield on debit for a +1,301% annual rate


 

The trade shadows one placed by Dough trader Fauzia. Implied volatility is lower than I do with my own trades, but let’s give it a try.

I shall use the JAN series of options, which trades for the last time 42 days hence, on Jan. 20.

Implied volatility stands at 19%, which stands in the 35th percentile of its annual range and the 42nd percentile of its most recent range. The price used for analysis was $48.00.

Iron fly, short the $47 calls and long the $52 calls,

short the $47 puts and long the $43 puts,

sold for a credit and expiring Jan. 21.

Probability of expiring out-of-the-money

JAN Strike OTM Δ
Calls 47 37.9% 65
Puts 47 58.8% 38

The premium is $2.05, which is 46% of the width of the position’s wings.

The risk/reward ratio is 1.4:1.

Decision for My Account

I have entered a position on XLU as described above. The stock at the time of entry was priced at $47.94.

— Tim Bovee, Portland, Oregon, Dec. 9, 2016

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